Community Banks Have Doubled Commercial Real Estate Loan Assets since the 90s

The past 20 years have brought a skyrocketing increase in the share of assets community banks allot to commercial real estate loans, as shown by a recent study b the Federal Deposit Insurance Corporation. Commercial real estate loans amounted to about 27% of all assets held by community banks last year, a 7% jump from the 2007 share and almost double the level of the 1990 percentage of 14.5%.

Community banks seem to have been going the opposite way when compared to larger banks, which have chosen to shrink their commercial real estate portfolios. Commercial properties only amounted to 8.8% of total assets of larger banks in 2011, a slight decrease from the 9.9 value of 2000 and that of 12.1% registered back in 1990.

The FDIC explained this state of affairs by pointing out that this choice of increasing commercial real estate assets allows community banks to maintain their traditional advantage of generating a higher net interest income. As a result, when it comes to the ratio of interest income to earning assets, community banks managed to rank better than larger banks in 17 years of the past 27. Community banks also happened to beat their larger competitors every year since 2001.

“Community banks have evolved over the study period from being predominantly retail lenders to commercial lenders, with a particular focus on lending secured by commercial real estate,” the study says.

The FDIC analyzed community banks in order to achieve a better understanding of their evolution over the past quarter of a century. This recent study has also updated the definition of a community bank, which commonly refers to banks with up to $1 billion in assets, adding criteria for lending, deposit gathering and footprint to the analysis.

The study revealed an overall performance gab between community and larger banks which is the direct result of lower interest income over the past five years.